GM IPO Date Set for Tomorrow: What’s Good for New GM is Bad for the Rest of America
In his 1953 confirmation hearing for Secretary of Defense in the incoming Eisenhower administration, former General Motors CEO Charles “Engine Charlie” Wilson was asked how he would handle conflicts of interests in the Defense Department’s dealings with his old firm. Wilson replied that “for years I thought that what was good for our country was good for General Motors, and vice versa.”
For decades, Wilson’s comment — misquoted as “What’s good for General Motors is good for the country” — has been paraded by liberals as an example of conservatives putting the concerns of a giant corporation ahead of those of the rest of America.
But since GM’s multi-billion dollar bailout and government takeover, the misquote from Wilson has become the philosophy of the Obama administration. They are treating the success of the initial public offering of the new GM, which will likely happen this Thursday, as proof positive that that the auto industry rescue and much of the rest of Obama’s economic polices must be good for the country.
But what exactly is so remarkable about a company coming back to life after a $65 billion taxpayer bailout, additional billions in tax breaks not available to other companies, and even an amazing “sovereign immunity” exemption for this IPO from anti-fraud securities laws and lawsuits? With this massive infusion of government aid and favors, even a company selling ketchup Popsicles to women wearing white gloves would likely show a profitable quarter! (Hat tip for the Popsicle analogy to David Spade in Tommy Boy — one of my favorite movies about business.)
But how successful and profitable the new GM will be — and there are still many doubts that linger on the company’s financial condition and unfunded liabilities (see this NPR piece) — is not the right question to ask if its bailout and takeover were good for the economy. As I wrote a year and a half ago on OpenMarket, “The measure of success should not be how fast Chrysler and GM emerge from this bankruptcy, but the degree to which contracts are honored in an impartial process.”
By this measure, due to the precedent set by the government running roughshod over the contractual rights of Chrysler’s secured lenders, GM’s bondholders and dealers franchised to sell both brands of vehicles, the bailout/takeover is a complete failure.
The bankruptcy courts rubber-stamped a reorganization plan designed by Obama’s “Team Auto” officials such as Steven Rattner that disregarded two centuries of bankruptcy precedent to massively favor the United Auto Workers over bondholders. As a result, according to several prominent business academics, the cost of capital will likely experience a significant rise for all U.S. businesses and entrepreneurs who wish to form new firms.
As Todd Zywicki, professor of law at George Mason University, so eloquently put it in a Wall Street Journal op-ed: “By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation.”
A look at the disproportionate equity stakes received by the UAW shows the depth of the bondholder robbery that took place. As described by Ross Kaminsky of the Heartland Institute and Rossputin blog:
In a stunning transfer of wealth from private investors to the government and unions, the UAW will own 75% more of the new GM than the investors holding $27 billion of debt to the existing company, even though GM’s own bankruptcy filing shows that the “employee obligations” to the UAW are billions of dollars less than the debt owed to bondholders. And bondholders will get 1/6th the ownership stake of the government despite having lent more than half as much money to GM.
In what probably was one of the most shameful moments of his administration, President Obama demagogued GM bondholders and Chrysler secured lenders as “a group of investment firms and hedge funds … who held out while everybody else made sacrifices.” First off, even hedge fund managers — such as Obama supporter and progressive benefactor George Soros — have the right to have valid contracts enforced. This is America, after all, and we still have the rule of law here.
Second, many of the bondholders and lenders were actually pension funds serving the very middle-class families and retirees the president always claims to be “protecting.” The Chrysler bankruptcy was actually halted by an ultimately unsuccessful lawsuit by Indiana state Treasurer Richard Mourdock on behalf of state pensions serving police officers and teachers that had lent to Chrysler.
From a pure analysis from the perspective of what progressives like to call “social justice” — who gets what — there is a striking inconsistency among the disparate treatment of UAW workers and retirees and similarly situated (if not poorer) teachers and police officers. As Barry Adler, professor of law at New Your University, testified to the Congressional Oversight Panel that scrutinizes TARP funds, “one might well wonder why the UAW funds should be favored over other retirement funds.”
Like George Mason’s Zywicki, Adler writes that the precedent set by these arbitrary and capricious bankruptcies are significantly raising the costs of capital for other firms. “The automaker bankruptcies may usher in a period where the specter of insolvency will increase the cost of capital in an economy where affordable credit is sorely needed,” Adler states. He adds that “the cases establish a precedent that could undermine the bankruptcy process in the future, even if the government receded from the scene.”
What about the jobs? It certainly saved some at a very high cost, but probably not for the country as a whole. Unemployment, after all, is still around 10 percent.
Numbers like “a million jobs” are thrown out, but unfortunately the bailout/takeover proponents use the same shoddy “saved or created” methodology used to justify the stimulus. No one knows what would have happened if the government would have stayed out. But during the same time, some pretty big firms — such as the nation’s second largest shopping mall owner General Growth Properties — went through the bankruptcy process and reorganized without any government funding. Even if GM or Chrysler had to liquidate, portions of their businesses would likely have been bought out by rivals such as Ford, Hyundai, and Toyota, and some workers would have been reemployed, albeit with less generous benefits (the workers now have benefits more generous than most blue-collar and some white-collar workers).
In fact, as a whole, the auto rescue may result in net job losses, both because of the likely increase in the cost of capital from bondholder treatment, and because of the rapid shutdown of auto dealers that has cost tens of thousands of jobs. Some dealers would have and should have been closed in a normal bankruptcy, but the special inspector general for TARP (SIGTARP) found in a report that the extraordinarily “rapid pace” of dealer closings resulted in “tens of thousands of dealership jobs [that] were immediately put in jeopardy.”
The SIGTARP also found that “job losses at terminated dealerships were apparently not a substantial factor in the Auto Team’s consideration of the dealership termination issue.” In other words, the sales forces didn’t have the clout with the Obama administration that the UAW has.
So in this case, what was good for GM, Chrysler, and the UAW, put the screws to almost everyone else. (This column is not intended to offer investment advice on the GMO IPO being offered on the back of taxpayers, car dealership workers, and pension funds.)
CEI Research Associate Andrew Kwiatkowski contributed to this post.
Image credit: hanneorla’s flickr photostream.